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  • Eric Coffin Pinpoints The Mining Companies With Resources That Are Right For Today's Market

    Eric Coffin, long-time editor of the Hard Rock Analyst group of publications, has seen the all-time highs in the junior mining space, and the current three-year bear market has taught him to adjust his expectations. He says the companies that he follows that have performed recently all had a specific event-a bigger resource number, a new economic study or even a discovery-that prompted the market to rerate the stock. Coffin says that, as always, it is about solid management and good projects, but it's no longer about who has the biggest copper or gold resource, it's about which company has a resource that makes sense. In this interview with The Gold Report, he suggests some companies with resources that not only make sense but could make even more sense to larger companies.

    The Gold Report: At the subscriber investment summit in Toronto in March 2015, you had a talk titled "Life in a Zero Yield World." What is wrong with that world?

    Eric Coffin: A zero yield world is the result of four or five years of central banks essentially buying the hell out of the bond market, which is what the European Central Bank [ECB] is doing right now. And buying those bonds, also known as quantitative easing [QE], drives down yields. QE has helped the U.S. and will probably help the European economies but it creates a lot of distortions. We tend to see a lot of money driven into high-risk areas, like heavily leveraged commodity and exchange-traded funds [ETF] bets and things like art and collectibles, because there are these large money pools that can raise capital at close to zero rates, and that tends to make people take greater risks. How that ends remains to be seen, but central bankers realize that they need to start weaning economies off of QE because when you generate that much risk capital and start creating that many distortions, it quite often doesn't end well.

    TGR: Can these economies successfully be weaned off QE?

    EC: Maybe. On one side there is the "wealth effect," which is the positive impact on the economy from people seeing their portfolios get larger. And that was always part of the plan. Most economists describe the wealth effect as a side effect of QE, but I don't think policy makers at the U.S. Federal Reserve or the ECB think that way. The problem with the wealth effect is it mainly benefits-you guessed it-the already wealthy. I think that is why it hasn't generated higher growth yet or higher inflation except in "one percenter playgrounds" like the fine art market. The U.S. economy is not doing that great overall and the ECB is trying to climb out of its fourth recession in the last five or six years. In both cases much of the money driving these economies is washing in and out of the equity markets and traders are focused on what central bankers are going to do.

    In the last few months we have seen huge market swings based on things said by either U.S. Federal Reserve Chairman Janet Yellen or ECB President Mario Draghi. It's not healthy. If we step back and take a 10,000-foot view of the markets, anybody with a finance background knows that an ECB rate cut or for that matter a Fed rate boost of 25 or 50 basis points is not going to make any difference in the real world. But with so much of the money chasing bureaucratic decisions, it is creating distortions and now the Fed has got to find a way to carefully ease out of QE. But if the Fed surprises the markets, the markets are going to get clobbered. It's a tightrope walk for Yellen.

    TGR: Throughout these last few years your job has been to clear up some of the market distortion for mining investors. What are some macro indicators that mining investors should follow and why?

    EC: It's a good idea to keep your eye on inflation indicators because metal prices are heavily influenced by inflation expectations. I follow the Treasury Inflation Protection Securities [TIPS]. TIPS are basically inflation-indexed securities and there are ETFs for these that are heavily traded. These get bought as inflation protection; the way the price of those mutual funds and ETFs swings up and down gives us a read on traders' inflation expectations. In the last few months, with collapsing oil prices, the bugaboo in the market has been deflation. But in the last little while we have seen a massive flow of funds into these inflation-protected mutual funds and ETFs. It's a bit of a head scratcher because consumer price index numbers still look flat.

    When it comes to the U.S., obviously everybody watches the jobs report. That has a big impact. One thing I've been watching closely is real wage gains. Even though the U.S. has seen its unemployment rate drop from about 12% to 5.5%, wage gains for average American workers-80% of the workforce-remain at around 2% before inflation, so after inflation it was next to nothing. People on Wall Street predict that the economy is going to accelerate by 3-5% but I don't see how that happens unless we start seeing real wage gains because 70% of the U.S. economy is consumer spending. You have to pay people money before they can spend it.

    I watch currencies, too, because part of the gold trade is currencies, and until recently, gold has followed the euro fairly closely.

    TGR: Yellen recently said U.S. equity markets look "frothy" and recent U.S. dollar weakness seems to back that view. How do you expect gold to perform through the end of the year and perhaps beyond that?

    EC: I've been a bit disappointed that gold hasn't traded better in the last few sessions but it seems that gold traders are particularly focused on the Fed raising rates. The consensus seems to be that it is going to raise rates in June and that will not help the gold price. But I was one of the few people who didn't expect the euro to go to U.S. dollar parity or below earlier this year. The euro has instead had a nice bounce and that's largely because many international investors have decided that European stock indexes are the next big thing, so there's been huge fund flows into Europe.

    It's market gospel right now that if the U.S. starts raising interest rates, the U.S. dollar has to go higher and higher, and that's seen as negative for gold. In a recent edition of Hard Rock Analyst [HRA] there was a chart [reproduced below] that showed the trace of the U.S. Dollar Index through the last four tightening cycles when the Fed went from cutting rates or neutral to raising rates. In all four cases the U.S. dollar dropped once rate increases started. It was a "buy on rumor, sell on news" situation. In a couple of cases it fell about 10% within four months of the start of tightening. The ECB and Bank of Japan trying to hold their currencies down may complicate things this time but still we may get better action on the currency side than people expect. It's quite conceivable that gold could get through $1,300 per ounce [$1,300/oz] relatively quickly once it dawns on people that the dollar index isn't going to the moon.

    We also may see stronger gold demand in China if there is a significant correction in the Shanghai market, which has more than doubled in the previous 12 months. If we look at a long-term chart of the Shanghai exchange going back about 30 years, these big bull runs have happened four or five times, closely followed by equally big drops. I don't know when the top is going to be in, but it looks pretty parabolic; moves like that tend to end badly.

    TGR: Against that backdrop, where do you see the light at the end of the tunnel in the junior mining equities market?

    EC: A few companies on my list have performed better recently and they all have one thing in common: a specific event-a resource number, a new economic study or discovery-that was significant enough that it allowed the market to rerate the stock. It feels as if we are finally seeing the wheat get separated from the chaff-and that has to happen. Seeing an increased focus on the relatively small percentage of companies that have good projects and good management is not going to give us the mother of all bull markets, but it will give us a decent market with room for gains-in that subset of companies.

    We all should focus on the small set of companies that really know what they're doing because until we see a large move in commodity prices, that's the only place where we're going to see gains. This is not one of those markets where it's a matter of who has the biggest copper or gold resource; it's about who has a resource that makes sense or has the discovery potential for one. The other performer has been producers that, after three years of putting up crappy numbers, are finally starting to see their numbers improve. Three years of cost cutting and focusing on margin per ton seems to finally be starting to pay off. If they can do this with a flat gold or copper price, what happens when the commodity prices go up 20-30%? They're going to blow the doors off.

    TGR: In several HRA posts you've talked about the all-important funding season for junior miners. How is it shaping up?

    EC: It hasn't been great. A few companies on my list have done sizable placements and most of the companies that I follow aren't running on fumes anyway; that's part of the reason I'm following them. In general, the end of May is seen as the end of the financing window until October. We don't have a lot of it left. It would be nice to see even a small move in the gold price to help free up a little cash.

    TGR: Please give us one bulletproof call.

    EC: Ha! Piece of cake! If you want something bigger and safer, I would look pretty hard at Nevsun Resources Ltd. (NYSEMKT:NSU). You want to buy it on weakness, if you can, but it's a well-run and profitable company. Bisha's a fabulous deposit in Eritrea. Nevsun started production at Bisha when gold was near its all-time high and gold dominated production for almost two years. As gold prices started falling the copper grades were coming up and Bisha has been primarily a copper mine for the last two years, and will be for another 1.5. Then it will shift to being predominantly a zinc operation, which should be just about in time for a couple of large zinc mines to cease production and zinc prices to rise.

    The company has over $500M in cash and is generating about $20M/quarter in cash flow. Nevsun is drilling to expand Bisha at depth but also drilling out a nearby deposit called Harena, where it recently had some really nice drill holes. It's one of those companies where either there is some kind of deal to become a multi-mine company or a bigger company is going to make a takeover bid. One of those two things will happen by the end of 2016.

    TGR: On May 30 you'll be speaking at the Metals Investor Forum in Vancouver, Canada. The theme of the event is that after a four-year bear, mining markets are poised to rebound. What should attendees expect?

    EC: There are four of us speaking: Gwen Preston, Brien Lundin, John Kaiser and myself. For my part, I'm going to focus on companies that are advancing, even in a difficult market. Those are the deals that I think will get the most attention when markets start to improve. There will be presentations by all of the companies in attendance including some of the companies we just talked about. It's a daylong event with a catered lunch break and couple of long coffee breaks. That will give attendees a chance to talk to management one-on-one and ask follow-up questions. Subscribers love it.

    TGR: Thank you for your time and insights, Eric.

    This interview was conducted by Brian Sylvester of The Gold Report and can be read in its entirety here.

    Eric Coffin is the editor of the HRA [Hard Rock Analyst] family of publications. Responsible for the "financial analysis" side of HRA, Coffin has a degree in corporate and investment finance. He has extensive experience in merger and acquisitions and small-company financing and promotion. For many years, he tracked the financial performance and funding of all exchange-listed Canadian mining companies and has helped with the formation of several successful exploration ventures. Coffin was one of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997. He also predicted the start of the current secular bull market in commodities based on the movement of the U.S. dollar in 2001 and the acceleration of growth in Asia and India. Coffin can be reached at hra@publishers-mgmt.com or the website www.hraadvisory.com.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

    Bottom of Form

    DISCLOSURE:
    1] Brian Sylvester conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2] The following companies mentioned in the interview are sponsors of Streetwise Reports: None. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3] Eric Coffin: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4] Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5] The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6] From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
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    May 14 2:50 PM | Link | Comment!
  • Five Mining Companies Joe Reagor Believes Are Ahead Of The Curve

    ROTH Capital's Joe Reagor believes that the price of gold will rise as confidence falls in the value of the U.S. dollar. In the meantime, several companies with great assets are struggling to raise financing and are thus considerably undervalued and possible takeover targets. In this interview with The Gold Report, he highlights three juniors and two mid-cap producers that are flying under the radar of investors.

    The Gold Report: What's your gold price forecast for the rest of 2015?

    Joe Reagor: For the full year, our average price is $1,260 per ounce [$1,260/oz]. If the U.S. dollar were to remain steady and not strengthen, gold could reach $1,300/oz by year-end.

    TGR: Gold was sold off heavily in the last week of April based on an anticipated interest rate hike by the Federal Reserve. Should the Fed actually raise the rate, how much of a negative effect will that have on gold and for how long?

    JR: It is commonly believed that rates will rise because the U.S. economy is improving, but we keep getting mixed signals. The most recent jobless claims were exceptionally good, but the Q1/15 GDP increase was only 0.2%. If we see a stiff rate increase because the Fed thinks the economy is strengthening, that could be bad for gold. Should the Fed choose to raise rates slowly over time, giving it the option to lower rates again if need be, I don't think that's bad for gold.

    TGR: Some people believe that a stiff rate hike would spook the market and cause an equities crash. What do you think?

    JR: I doubt the Fed would move on that without first providing a cushion to the markets. Should a rate hike spook the market and force the Fed to quickly lower rates again, I think gold would move higher quickly.

    TGR: Is it possible an interest rate hike has already been priced in to the price of gold?

    JR: The expectation of rate hikes is definitely priced into gold inherently through the strength of the U.S. dollar, as compared to, say, Europe, which has been forced to introduce further quantitative easing.

    TGR: The World Gold Council [WGC] 2014 survey showed continuing strong demand for physical gold both from Asian consumers and central banks. Do you think this trend will continue?

    JR: Definitely. The WGC's Q1/15 survey demonstrates that this trend is continuing. We believe that China will maintain its position as the world's largest consumer of gold as a store of value, with India as the largest consumer of gold for jewelry.

    TGR: Over the past year Russia has bought more than $7 billion [$7B] worth of gold bullion. Its total gold holdings of 1,208 tons are worth $49B, making it the world's fifth-largest holder. Some suggest that Russia and China are working in concert to use gold as part of a strategy to shift economic power from the U.S. to this rival axis. Is there any credence to this?

    JR: I believe Russia and China would prefer that the U.S. dollar not remain the world's reserve currency, which would shift the dynamics of the pricing of many commodities, not just gold. Exactly how they intend to accomplish this is not certain, but there's no question that this pushback against the U.S. dollar has the support of many countries.

    TGR: Shouldn't rising physical gold demand force higher gold prices?

    JR: The contract [or paper] gold market is significantly larger than the physical gold market. So an increase in physical demand doesn't necessarily result in enough of a total increase in gold demand to force higher prices in U.S. dollars.

    Outside the U.S., the value of gold in other currencies is up almost 20% already this year, which should result in better margins for non-U.S. producers. Should the U.S. dollar weaken by, say, 10%, that would move the gold price up to around the $1,300/oz we're predicting for year-end 2015. Beyond that, we believe that rising marginal production costs could drive gold to $1,450/oz.

    TGR: What are your forecasts for the prices of silver and zinc for the rest of 2015?

    JR: We expect a gold-silver price ratio of 70. Based on $1,300/oz gold, that would mean a silver price of about $18.50/oz.

    Our zinc forecast is a conservative $1.15 per pound by year-end. We believe there could be a serious zinc shortage by 2016. MMG Inc.'s [1208:HK] Century mine in Australia, which alone produces 4% of world zinc, will close shortly. Already, the London Metals Exchange [LME] zinc inventory has fallen from 1.2 million tons two years ago to under 500,000 tons [500 Kt] today.

    TGR: Given that silver is easier to buy and store than gold, could a decline in confidence in the U.S. dollar lead to the gold-silver ratio falling toward lower historic norms?

    JR: Perhaps over time the ratio will move to 65 or 60, but I doubt that we will see a return of 2010-2012, when it was below 50. The recoverable ratio of silver to gold in the average deposit discovered today is now closer to 80. This is due to significant recent improvements in silver recovery rates that have not been matched by gold recovery rate improvements, which came decades earlier.

    TGR: Can we expect an increase in the number of pure-play silver companies?

    JR: Not without sustained higher gold and silver prices. Miners generally are moving away from pure plays in order to lessen the impacts of swings in the prices of precious metals. In recent years, a number of big silver producers have made gold asset purchases and have built mines with strong base metals components so they can operate even in down markets.

    TGR: Which Canadian juniors with near-term gold projects are your favorites?

    JR: Pretium Resources Inc. (NYSE:PVG) is more of a mid cap, but because it is in the development stage and doesn't have revenues, we put it in the junior basket.

    TGR: Pretium has reached two milestones this year: permitting approval of the Brucejack project by the British Columbia government and the signing of a cooperation and benefits agreement with the Nisga'a Indian band. How do these events affect their valuation?

    JR: Pretium has derisked its asset but still has two hurdles remaining. The company needs federal permitting, which is expected to take 150 days from the receipt of the environmental permits, and it needs to complete the financing process. Part of the reason we like this company so much is that it is now so close to the finish line.

    There has been an overhang on Pretium's valuation since Strathcona Mineral Services stepped away during bulk sampling in October 2013.

    TGR: The Brucejack deposit has been characterized as "nuggety," which is often hard to understand. Has Pretium demonstrated greater confidence in the quality of its resource since 2013?

    JR: When Strathcona stepped away, Pretium was only 2 Kt into a 10 Kt bulk sample. The remaining 8 Kt came in above expectations and demonstrated that Brucejack does have significant gold-production capabilities. Pretium got 5,800 oz gold out of 10 Kt, and its target was only 4,000 oz.

    Brucejack is not "nuggety" in the sense of how we understand that term in the U.S. and Canada. The deposit structure is more similar to that which we see in islands in the Pacific Ocean, which makes sense because geologists tell us that part of British Columbia was an island before it joined the mainland. Brucejack has high-grade veinlets and thus manifests quite variable gold grades. There will be pockets with a low-grade halo and then a spike of visible gold will appear.

    TGR: How does Pretium propose to deal with this variability?

    JR: By employing large-scale bulk mining in order to capture all the gold.

    TGR: Brucejack will require a capital expenditure [capex] of $747 million [$747M]. How does Pretium intend to raise it?

    JR: The company raised CA$81M in equity in January. We expect that the rest will be raised through a combination of bank debt and a gold-streaming agreement, perhaps 50% bank debt and 25% gold streaming, which wouldn't leave much in the form of equity to be raised. We're pretty confident that we'll see that in the next two to three months.

    We would also note that because of the weakness of the Canadian dollar, the capex might be reduced by as much as 20% in U.S. dollar terms.

    TGR: When do you expect Brucejack to begin construction and then production?

    JR: Should Pretium break ground in July, that would put it on a timeframe of Q1/17 for first production.

    TGR: Is Pretium a takeover target?

    JR: We don't really expect this unless it was to happen before financing is completed, and that's expected pretty soon. To buy Pretium and develop Brucejack would cost about $1.5-1.8B all told, and that would be a big risk for a major to take on in this environment.

    TGR: Would you name a mid-tier gold producer you think is underappreciated by the market?

    JR: IAMGOLD Corp. (IAG) has not gotten credit for its improvements.

    TGR: How specifically has the company improved?

    JR: First, IAMGOLD sold a niobium mine for $500M. This put the company in a net cash position for the first time since 2013. There is no longer any worry it could be forced into bankruptcy when its debt came due assuming the cash is used to repay debt. The company is considering using some of this capital to finance acquisitions or potentially to buy out some partners on smaller-scale assets. Our preference would be that IAMGOLD uses the majority of the half-billion dollars to repay debt, and I expect it to make a decision to do so by the end of 2015 or early 2016. This would fundamentally strengthen the company.

    The second way the company has improved is by reducing costs at the majority of its mines. That puts IAMGOLD in a much better position to be sustainable at low gold prices, but because it is also somewhat of a higher-cost producer, it still has significant leverage in a gold price recovery.

    TGR: What are its prospects for growth?

    JR: Mostly through the expansion of existing assets over the next two to three years.

    TGR: Do you see IAMGOLD as a takeover target?

    JR: I don't think the company is a takeout target because its management team is a bit different from the norm. They're more from the energy sector and so they don't have the usual personal connections with other companies in this sector.

    I think IAMGOLD's management is more concerned with delivering value to shareholders. On the acquisition side, I think a smaller-scale buy would be viewed as a positive by the market. There has been some speculation about larger asset purchases, but I think that's a bit more than the company can afford to bite off at this time. And I think IAMGOLD knows this.

    TGR: Agnico Eagle Mines Ltd. (AEM) has bought three companies in the last two years at very attractive prices. Should miners strike while the iron is hot, and valuations are low?

    JR: Some of the smarter companies with very strong balance sheets-and Agnico falls into that category-are buying up earlier-stage assets that are far enough along so that there is a vision of how long it will take to get them into production and what their potential returns are.

    The vast majority of people expect that over the next two to three years there should be a substantial recovery in gold prices. So Agnico is trying to be ahead of that curve, as are some other mid caps. I don't see this sort of thing coming as much from the majors, however. A lot of them did their buying at the top, and their balance sheets aren't as clean as they once were.

    TGR: A great many investors in gold equities fled after the price of gold fell from over $1,900/oz to almost $1,100/oz. Does this smaller market mean more bargain companies with greater leverage?

    JR: Yes, there are some bargains out there. But I think it will take a catalyst of some sort for investors to return to the market. I've heard repeatedly that many investors believe certain spaces are a bit frothy now, and if we see a pullback in some of them, capital would be freed up to invest in mining as an alternative in longer-term portfolios.

    TGR: Joe, thank you for your time and your insights.

    This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.

    Joe Reagor is a research analyst with ROTH Capital Partners, providing equity research coverage of the natural resources sector. Prior to ROTH, he worked in equity research at Global Hunter Securities and at Very Independent Research, covering a wide array of resources companies including metals [steel and aluminum], mining [gold, silver and base metals] and forest products [containerboard, OCC, UFS and pulp]. Reagor earned a Bachelor of Arts in economics and mathematics from Monmouth University.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

    Bottom of Form

    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report and provides services to Streetwise Reports as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Pretium Resources Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
    3) Joe Reagor: I own, or my family owns, shares of the following companies mentioned in this interview: Agnico-Eagle Mines Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
    4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
    5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
    6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

    Streetwise - The Gold Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (NYSE:I) only in whole (and always including this disclaimer), but (ii) never in part.

    Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

    Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

    Participating companies provide the logos used in The Gold Report. These logos are trademarks and are the property of the individual companies.

    101 Second St., Suite 110
    Petaluma, CA 94952

    Tel.: (707) 981-8999
    Fax: (707) 981-8998
    Email: jluther@streetwisereports.com

    May 11 3:24 PM | Link | Comment!
  • Chris Mancini's High-Quality Gold Miners That Have Positioned Themselves Well In The Downturn

    Chris Mancini, an analyst with the Gabelli Gold Fund, is confident that gold's day will come, perhaps as soon as 2016. He argues that the decline of confidence in paper currencies is inevitable and that the Federal Reserve is fast running out of ways to prop up the U.S. dollar. In this interview with The Gold Report, Mancini advises investors to go for the best of the best: gold miners with cash flow, great balance sheets, low costs and good management. And he also highlights several companies that are unloved now but will become so when the gold price rises.

    The Gold Report: The U.S. Federal Reserve has downgraded its forecasts for both economic growth and inflation. That being the case, why would it raise interest rates?

    Chris Mancini: There's a certain contingent in the Fed that believes that its zero interest monetary policy might result in adverse consequences going forward. This contingent is dead set on raising rates and trying to get back to some level of normalcy in interest-rate policy.

    TGR: There's a school of thought that holds that the U.S. economy has become addicted to cheap money. What's your view?

    CM: There's no question that much of U.S. economic growth in recent years is due to very low interest rates. The average interest rate on auto loans is the lowest ever. That obviously spurs auto sales. The rates charged for federally subsidized student loans are close to historic lows. That spurs demand for college and university courses. And even though the housing industry is still struggling with an inventory glut, the 30-year mortgage rate of 3.75% spurs demand for housing.

    So, I think that if interest rates do rise, there's a good chance that the economy will slow, and there will be a panicked reaction from the stock market.

    TGR: Despite this soft recovery, the equity markets have never been stronger. Why has this happened?

    CM: It's another function of low interest rates. If you keep your money in the bank, you're getting zero percent and thus losing money on a real basis. This has forced savers into other asset classes. And money is flooding into America from all over the world because, compared to, say, the Eurozone and Japan, which are struggling with deflation, the U.S. economy looks pretty good.

    TGR: Is an economy that punishes savers sustainable?

    CM: It's sustainable until it's not. Asset prices continue to increase greatly, and at some point people will start to realize that the value of money is not what it seems. That will lead to a crisis of confidence and, eventually, to the deterioration of the monetary system. The question is when. And I don't know the answer to that.

    TGR: Should an interest rate hike backfire, could we see the return of quantitative easing [QE]?

    CM: If the economy slows after a rate hike, I think the first thing the Fed will do is to lower rates to zero again. And if that doesn't kick start the economy, which it probably won't, there's a good chance we will get QE4.

    TGR: You've argued that "Paper speculators in the gold futures market have been a more important factor in determining the movement of the gold price this year than has physical demand from gold consumers." Does the speculation depress the gold price?

    CM: On certain days it definitely does. Days when the shorts come back in and when the speculative longs take their positions off. But speculation can also lead to a higher gold price. For instance, when gold went to $1,300 per ounce [$1,300/oz] at the beginning of this year, I think a lot of this rise was due to speculators putting longs on and covering their huge short positions.

    TGR: Aren't these speculators flirting with disaster?

    CM: We have recently seen huge moves up or down in the gold price in the space of minutes. That tells me that speculators who are using leverage are making moves to avoid being wiped out.

    TGR: Physical gold demand from Asia and from central banks remains strong. Are we getting close to the point where, as you put it, "Rock will beat paper?"

    CM: That will happen when Americans lose hope in the ability of the Fed to direct economic policy and buy gold again, whether in physical form or more likely in the physically backed exchange-traded funds like SPDR Gold Shares [GLD:NYSEArca]. That's what happened in 2011, when the gold price topped $1,900/oz.

    TGR: What's your gold price forecast for 2015?

    CM: I expect it will trade in the $1,200-1,300/oz range. There's a very good chance 2016 could be a much better year for gold, especially if the Fed lowers interest rates again and embarks on QE4.

    The potential end game for gold is if a complete loss of confidence in the U.S. dollar forces the government to peg it to gold.

    TGR: In a Gabelli note dated April 24, you wrote, "High-quality gold mining companies have positioned themselves well during this current downturn in the gold market." What are the qualities that distinguish high-quality gold miners?

    CM: We look for companies with very little debt on their balance sheets, low operating costs and very good management. One example would be Randgold Resources Ltd. (NASDAQ:GOLD). It has net cash on its balance sheet, no debt and great management. Its all-in sustaining costs [AISC] this year should be around $900/oz. Randgold would be able to survive a significant drop in the gold price. And this company has the means to make good acquisitions at low prices and arrange profitable joint-venture [JV] deals on strong assets. Its management has been talking about doing just that.

    TGR: What other miners do you consider to be high quality?

    CM: Fresnillo Plc (OTCPK:FNLPF) [FRES:LSE], Agnico Eagle Mines Ltd. (NYSE:AEM) and Tahoe Resources Inc. (TAHO) are three others.

    Fresnillo has a very small and manageable debt burden. It is in a growth phase now. It's operating costs are declining because of the Mexican peso's weakness against the U.S. dollar and declining construction and drilling costs. The cost of labor in Mexico is not declining, but it's not increasing as it did in the recent past when there were lots of projects being built in Mexico. This company's AISC are around $5/oz for silver and $800/oz for gold. Fresnillo is well positioned for the future.

    TGR: Do you have any concerns about the political and social climate in Mexico?

    CM: There are issues in Zacatecas and Sonora where Fresnillo operates. I expect that the company will take steps to increase security to the extent that it's necessary. Fresnillo is a Mexican company that has been operating in the country for over 40 years. The recent robbery of McEwen Mining Inc. [MUX:TSX; MUX:NYSE] was a wake-up call for the industry.

    TGR: What do you like about Agnico?

    CM: Agnico has debt, but it's manageable. Its Osisko acquisition last year positioned it as the 800-pound gorilla in the Abitibi Belt, one of the best places in the world to mine. Agnico is a low-cost producer with management that has a track record of investing capital wisely. And it has good growth potential.

    TGR: Besides Osisko, Agnico has also bought Cayden Resources Inc. and Soltoro Ltd. What do you make of this strategy?

    CM: Agnico has been taking advantage of the downturn and buying these companies very much on the cheap. Because the company didn't come into the downturn with much debt, it was able to borrow money to buy Osisko, which is cash-flow generative.

    TGR: And what impresses you about Tahoe?

    CM: It has Escobal in Guatemala, one of the best primary silver mines anywhere. The merger with Rio Alto Mining Ltd. gives it cash on the balance sheet, La Arena in Peru, which produced 222,000 ounces [222 Koz] gold in 2014, and the Shahuindo gold-silver project in Peru. Both of Tahoe's producing mines are low cost.

    Tahoe will able to build Shahuindo at low cost. After that goes into production, the company will then have three cash-flowing mines and no debt. This gives it the opportunity to make another acquisition and use its cash flow to build it.

    TGR: One of Tahoe's employees is being confined by a Guatemalan court. Does this concern you?

    CM: Guatemala is a difficult place to mine. The people are great, but the politics are a mess. It was a huge shame to see the royalty rate increase after a last-minute deal with no consultation with the mining sector. It is a real testament to Tahoe and to the Guatemalan people that the company has been able to ramp up production to 4,500 tons a day from an all-underground mine with an almost exclusively Guatemalan workforce trained onsite.

    TGR: Which streaming companies does Gabelli hold?

    CM: Our biggest holding is in Franco-Nevada Corp. (NYSE:FNV) followed by Royal Gold Inc. (NASDAQ:RGLD), Silver Wheaton Corp. (SLW) and Osisko Gold Royalties Ltd. (OTC:OKSKF) [OR:TSX].

    Franco-Nevada is the gold standard of royalty and streaming companies. It has some of the highest-quality streams and royalties in the world, a well-diversified portfolio, cash on its balance sheet and management that is willing to invest at the down points in the cycle.

    Royal Gold's portfolio isn't as diversified as Franco's, but it has some very good royalties, including Goldcorp Inc.'s (NYSE:GG) Peñasquito mine in Mexico and Thompson Creek Metals Co. Inc.'s [TCM:TSX; TC:NYSE] Mount Milligan mine in British Columbia. It has been a little bit less aggressive in deploying its cash during this downturn, but it has done some prudent deals recently.

    Silver Wheaton has been very aggressive and has royalties on some very good projects, including Peñasquito. It has been dealing with a tax problem in Canada, but I think that will be resolved this year. It does have debt, but this company is a very good buy today.

    TGR: Will Silver Wheaton go more aggressively into gold?

    CM: It is doing that already. Its most recent deal was buying an additional 25% stream of Vale S.A.'s [VALE:NYSE] Salobo mine in Brazil for $900 million [$900M]. That was a very big deal for Silver Wheaton and pleases us because we prefer gold streaming to silver streaming.

    TGR: And what do you like about Osisko Gold Royalties?

    CM: We got Osisko Gold Royalties after Agnico and Yamana Gold Inc. [YRI:TSX; AUY:NYSE; YAU:LSE] bought Osisko. Now, after its takeover of Virginia Mines, Osisko Royalties has royalties on Éléonore and Canadian Malartic, two of the world's best gold mines in a fantastic jurisdiction, Quebec. These are net royalties, so the money comes off the top line. Osisko Royalties has a lot of cash, which it can use to make further acquisitions.

    TGR: Do you expect to see any merger and acquisitions among the gold majors?

    CM: The proposed merger of Barrick Gold Corp. (NYSE:ABX) and Newmont Mining Corp. (NYSE:NEM) would have made sense from an operational point of view because of the synergies it would have created in Nevada. The new chairman of Barrick, John Thornton, saw an opportunity, but it didn't materialize. I don't expect we'll see any mega-mergers anytime soon.

    TGR: What do you think of Barrick's prospects?

    CM: We have a position in Barrick. It has some of the best assets in the world, but it's over-leveraged and going through a structural reorganization. If the company executes this properly, the stock will do very well. It's cheap relative to the quality of its assets, and it's cash-flow generative even at $1,200/oz gold.

    TGR: What can you tell us about the other gold majors the Gabelli Fund holds?

    CM: Newmont Mining has really executed on its plan of bringing down costs. The company has maximized the potential of every single asset it has, and has sold some assets to deleverage its balance sheet. Now it's in a good position to produce profitably, pay a small dividend and also build projects that generate good rates of return. Newmont is building two projects now: Merian in Suriname and Long Canyon in Nevada. Newmont is now producing close to 5 million ounces [5 Moz] of gold per year. The company has a lot of upside if and when the gold price moves back up.

    AngloGold Ashanti Ltd. (NYSE:AU) has a lot of leverage relative to its cash flow and level of production. If the gold price does go up, AngloGold is going to go up, by multiples. The company has good assets, and we like its management.

    Goldcorp is another high-quality gold miner. It has a very manageable debt position and low costs and has been taking advantage of the current downturn in the market.

    TGR: Let's talk about companies that are less loved by the market than they should be.

    CM: I'll mention two: MAG Silver Corp. (NYSEMKT:MVG) and Richmont Mines Inc. (NYSEMKT:RIC).

    TGR: Why are they unloved?

    CM: The bear market has driven out the generalist investors. To the degree you have anybody getting back in, they will first look at royalty/streaming companies, then safe producers like Randgold, Fresnillo, Agnico and Goldcorp. Then leveraged producers like Barrick, Newmont or AngloGold. Finally, they would look at mid-tier producers like B2Gold Corp. [BTG:NYSE; BTO:TSX; B2G:NSX], Centerra Gold Inc. [CG:TSX; CADGF:OTCPK] or AuRico Gold Inc.[AUQ:TSX; AUQ:NYSE]. Companies like MAG Silver and Richmont aren't getting the attention they deserve.

    TGR: What impresses you about MAG Silver?

    CM: It has one of the best undeveloped silver deposits in the world, Juanicipio, a JV with Fresnillo, which is adjacent to Fresnillo's flagship mine in Zacatecas. This will be extremely cash-flow generative with an AISC of about $5/oz. MAG Silver has a great exploration team. Peter Megaw is one of the best geologists around, and he has discovered another silver deposit in Mexico called Cinco de Mayo, which I think will be the company's second mine. MAG Silver is trading at a big discount relative to just its Juanicipio deposit, so once its permitting problems at Cinco are sorted, shareholders will be getting that for free.

    TGR: And what impresses you about Richmont?

    CM: It's a small producer now, but it has a lot of growth potential at its Island gold mine. It's in a great jurisdiction, northern Ontario. From a valuation perspective it's trading at a big discount to its potential net asset value based on currently delineated resources. It's a lot less risky than a predevelopment company because the operation is built, and we know how much it costs to mine and mill there. Richmont has an unleveraged balance sheet and net cash.

    TGR: Given your belief that gold will likely have a good year in 2016, what's your advice for investors today?

    CM: Investors should have a bunch of gold equities. They should look first for companies that will do well in a higher market and are also protected on the downside. They should then look for companies that are unloved now but whose leverage will make them lovable when gold goes higher.

    TGR: Chris, thank you for your time and your insights.

    This interview was conducted by Kevin Michael Grace of The Gold Report and can be read in its entirety here.

    Chris Mancini is a research analyst for the Gabelli Gold Fund, specializing in precious metals mining companies. He has over 15 years of investment management experience, including research analyst positions at Satellite Asset Management and R6 Capital Management. Mancini earned a bachelor's degree in economics with honors from Boston College and is a holder of the CFA designation.

    Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

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    DISCLOSURE:
    1) Kevin Michael Grace conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
    2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Tahoe Resources Inc., Silver Wheaton Corp., MAG Silver Corp. and Richmont Mines Inc., Goldcorp Inc. and Franco-Nevada Corp. are not associated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.
    3) Chris Mancini: I own, or my family owns, shares of the following companies mentioned in this interview: Agnico Eagle Mines Ltd., AuRico Gold Inc., Centerra Gold Inc., Franco-Nevada Corp., Fresnillo Plc, Goldcorp Inc., MAG Silver Corp., Osisko Gold Royalties Ltd., Randgold Resources Ltd., Royal Gold Inc., and Tahoe Resources Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. The Gabelli Gold Fund holds the following companies: Agnico Eagle Mines Ltd., AngloGold Ashanti Ltd., AuRico Gold Inc., B2Gold Corp., Barrick Gold Corp., Centerra Gold Inc., Franco-Nevada Corp., Fresnillo Plc, Goldcorp Inc., MAG Silver Corp., Newmont Mining Corp., Osisko Gold Royalties Ltd., Randgold Resources Ltd., Richmont Mines Inc., Royal Gold Inc., Silver Wheaton Corp., Tahoe Resources Inc. and Yamana Gold Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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